Goodwill to All Pieces

Are companies properly valuing and assigning acquired intangibles to business units?

Fortunately, CFOs or controllers who find themselves at odds with a deal-making CEO or an aggressive investment- bank estimate have another powerful ally. “Boards are paying more attention to acquisitions since Sarbanes-Oxley,” says Shaw. They, too, are quick to seek outside help. “It used to be that if a CEO wanted to do a deal, it was his ball game,” Shaw explains. “Now, boards are putting the deal makers under more pressure.”

Not A Big Deal?

Impairment testing, adds Shaw, has introduced “a more uncertain, volatile treatment of goodwill” than the straight-line depreciation of the past. That’s another argument in favor of professional valuation — goodwill impairment can play havoc with a company’s books. That was particularly true of stock deals done during the boom, when inflated stock prices led to inflated goodwill. A case in point: AOL Time Warner — a deal done with AOL’s high-flying stock as currency — took a goodwill impairment charge of $54 billion after adopting FAS 142.

Business reorganizations can also result in impairment. FAS 142 does not rely specifically on business segments as defined by FAS 131, but on often smaller “reporting units.” To make sure that companies don’t reshuffle reporting units simply to shield goodwill from impairment, FASB declared that any restructuring will automatically trigger an impairment test. Boeing, for example, recorded a charge of $2.4 billion when it adopted FAS 142 in the first quarter of 2002, then took another $931 million this April after a January reorganization triggered an early round of impairment testing.

CFOs are quick to note that changes in accounting haven’t changed the way they do deals. The ultimate measure is still the cash generated by the deal, and impairments, if they occur, are a noncash charge.

“The reality is that you have already spent the cash,” says Tom Manley, CFO of Burlington, Massachusetts-based Cognos Inc., which recently acquired planning-software provider Adaytum for $157 million in cash. “I think shareholders understand that impairment is not going to be an incremental cash expense.” However, he adds, “it is obviously a very big negative if a company is writing off a substantial amount of goodwill because [the acquisition] is not living up to expectations.”

Despite the notable charges by some firms last year — which, not coincidentally, could be attributed to a one-time accounting change — the perceived and actual risk of impairment seems low for many companies. Cognos, for example, will amortize $27.5 million in intangibles over the next five to seven years, but as a midsize company, it has only one reporting unit. Thus, Cognos’s market value would have to fall below the company’s book value before the Adaytum goodwill would be subject to further impairment testing. “Although it is a lot of goodwill on our balance sheet, it is small relative to the value of our company. It would be very difficult to find an impairment, given that I have one reporting unit,” says Manley, who nonetheless brought in outside valuation experts for the Adaytum deal.

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